Arnold Kling  

Jim Follain on Macro

The Job-Seeker's Paradox... The Political Externalities of...

He writes,

First, let's do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying macroeconomics built around national totals, such as national income, GDP and the aggregate unemployment rate. Instead, we are wise to take a more geographically granular view of our economy that measures regional, state and local economic activity and adapts policies specific to these areas. Focusing upon the national aggregate or the national average masks the extraordinary variation among markets in this country and, indeed, can even make it harder to identify seriously stressful events until it's too late. This is difficult to do, but c'est la vie.

Pointer from Richard Green (who liked that quote also), in turn from Mark Thoma. The usefulness, or lack thereof, of macroeconomic aggregates is a debate that is worth having. With PSST, of course, I am very much on Follain's side.

He continues,

Second, and at least as difficult to implement, we need to challenge those who base their policy prescriptions on overly simplistic paradigms and do more "stress testing" of the plans being put forward using multiple potential scenarios

He cites CBO forecasts and bank capital adequacy estimates as examples where such stress testing is most needed.

Finally, he writes,

Third, let's include more "contingent" budgeting, incorporating explicit connections between future spending and how the economy evolves. One of my favorite examples of this point is a 1999 agreement between the State of California and one of its major pension plans for state employees.[2] An assumption underlying the agreement was that "the Dow Jones Industrial Average would reach 25,000 in 2009 ..." The Dow is currently about half of that. The type of contingency budgeting I have in mind would call for adjustments to the pension plan in light of such an erroneous assumption underlying the agreement.

These are all excellent points about the shortcomings of current methods of central planning. However, Follain is trying to come up with ways to make central planning work. In principle, central planning could be improved by using more information more intelligently. In practice? ... I would instead look for ways to reduce our reliance on central planning.

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CATEGORIES: Macroeconomics

COMMENTS (1 to date)
Bill Conerly writes:

I agree that more granularity would help, but I don't think that geographic granularity is the answer. What I see in Oregon and Washington are two states ready to join the recovery party once the party starts. They are both waiting for the overall national economy to move forward. I'm not sure it makes sense, though, to say that they are waiting for Michigan and Nevada to recover, though I guess that's possible.

I'd rather see more industry granularity. Which businesses are spending on capital equipment, and which are not? And what types of equipment are being purchased by which industries? I think that would go a long way to help understand the role that investment incentives, such as accelerated depreciation, have on spending.

You could say that then we'd be trying to plan the economy. However, those of us primarily concerned with helping companies connect the dots between the economy and business decisions would find great value in the granular detail.

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